The Impact Of Geopolitical Risks On Exchange Rate Returns

Geopolitical risk is often regarded as an important factor in economic decision-making by policy makers,investors and enterprises.With the process of globalization,the degree of opening to the outside world continues to improve,and the international capital and trade exchanges increase greatly.When the geopolitical risks increase,the corresponding fluctuations of international capital and terms of trade often lead to changes in exchange rate market.Considering the unexpected characteristics of geopolitical risk events,this paper uses the characteristics of time-varying parameters and random variance of TVP-SV-VAR model to better fit the dynamic characteristics of parameters under the impact of risk events,analyses the impact of global geopolitical risk on exchange rate yields in different markets,and finally summarizes and discusses the impact of geopolitical risk on RMB exchange rate returns in China.The empirical results show that,firstly,in the face of global geopolitical risk events,the capital market has a clear choice for the size of the economy.Emerging economies have been impacted rapidly.The exchange rate returns has declined and spot fluctuation.Developed economies prefer hedging funds and exchange rate returns have risen gently.Second,the term structure of exchange rate return will affect the shock response,mainly because the evaluation of currency stability and safety has been absorbed into investors’expectations,reflected in the forward rate of exchange rate return.Third,trade and speculative channels play a role in the transmission of geopolitical risks in China.For the Sino-US trade war,exporters have stepped up their exports to the United States in an empty window before the implementation of tariff penalties,and the demand for foreign exchange has soared in the short run.Panic trading has pushed China’s exchange rate up temporarily.Therefore,on the one hand,investors should pay attention to the impact of geopolitical risk on exchange rate changes and adjust portfolio allocation in time.When the global geopolitical risk unexpectedly rises,China’s exchange rate usually falls.Investors can use this leading indicator to adjust portfolio allocation to avoid losses.On the other hand,the government should deal with the fluctuation of regional political situation steadily,reduce the impact of geopolitical risk on exchange rate,do a good job in stabilizing exchange rate management in advance,and predict geopolitical risk through open operation of foreign exchange market and GPR,so as to smooth exchange rate fluctuation in time.